Friday, January 27, 2012

An Italian resonance to India's retail liberalization debate

The opposition in Italy to President Mario Monti's decision to liberalize the heavily regulated retail trade bears strong echoes with India's experience with opening retail trade to greater foreign participation. As part of the Save Italy reforms, the government plans to deregulate operating hours for commercial venues and permit shopkeepers everywhere to set their own hours, and sharply reduce the norms that once regulated entrepreneurs trying to set up shop.

Although many consumers cheered, thrilled at the prospect of buying their provisions after hours, small-enterprise associations have denounced the new rules, calling them the death knell for mom-and-pop stores already struggling in Italy’s recessionary economy.

"Small retailers in Italy were already being squeezed by competition with supermarkets, not to mention the slumping economy, and that in Rome alone 10,000 small shops had closed in the past three years, putting about 35,000 people out of work. The government has to rethink this whole thing. Otherwise it is only going to help large chain stores."

These steps are part of reforms to open up closed occupations and promote competition. The closed occupations, with their prohibitive entry barriers, have been responsible for stifling competition and bringing about Italy's current state of economic sclerosis. Stiff opposition in Italy to such reforms is not confined to retail trade but also other similarly regulated professions like taxi drivers and pharmacists. Trade groups of each occupation prefer the status quo and are naturally opposed to all such reforms. They present these reforms as an attempt to defile Italy's cultural identity, traditions and history.

Though in both countries, the major source of opposition to liberalized and deregulated retail trade is the fear of competition from major retail chains driving out the smaller mom-and-pop traders, the underlying concerns are very different. In India, the fear is that, given the large share of population being involved in small hand-to-mouth retail trade (kirana shops), there would be massive labour market dislocation that would undermine the country's social stability. In Italy, the concerns are driven by mom-and-pop traders unwilling to forego their secure and comfortable professions and let large retail chains intrude into their markets.

In simple terms, while in the former, the opposition may have a very compelling economic argument, in the latter case, it is plain anti-competitive.

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